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Overview

1. Definitions
2. Judging Economic Allocations
3. Econ as a science

Reading: Ch 1 & Ch 2

Definitions:

Economics: the study of the choices people make and the actions they take in order to make
the best use of scarce resources in meeting their wants and needs
Economic Choices: consider the activity X, if the benefits of X > costs, then you should do X. If
the costs of X > benefits of X then you likely shouldn’t do X

ex. Activity X: a policy that reduces the speed limit on the highway between YEG & YYC
to 10km/h
Costs: change signs, time, enforcement, emissions, shipping & travelling costs
Benefits: less deaths

Thinking at the Margin: for activity X, if the marginal benefits of X > marginal costs of X then
you should do X
ex. You are taking 5 classes but are considering taking a 6th. Instead of analyzing the
costs/benefits of taking 6 classes as a whole, you would just analyze the cost/benefits of taking
the extra class

The two main branches of economics are:


Microeconomics: study of choices & actions of individual economic units such as households,
firms, consumers, etc.
Macroeconomics: study of behaviour of an entire economy, including issues like
unemployment, inflation and changes in the level of national income

Judging economic allocations:

Judging economic allocations: allocation of resources can be evaluated on the basis of;
1. Efficiency: Allocative efficiency is present when society's resources are so organized
that the present value of net benefits are maximized
2. Equity: distributing goods & services in a manner considered by society to be fair
3. Moral/political consequences

Positive vs Normative economics:


Positive economics: involves statements about what is and can be tested by checking the
statements against the observed facts (ex. If the price of coffee rises, people will drink less
coffee)
Normative economics: involves statements about what ought to be. Depends upon values and
beliefs and cannot be tested. (ex. Taxes should be used to redistribute income from high-
income groups to low-income groups)

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